Loan Modification Performance:
A Multivariate Review Approach

Abstract

Since 2008, the housing finance industry has initiated a wide array of mortgage modification programs that have had varying degrees of success. With a significant portion of loans that are currently performing having already received modifications and the prospect for further modifications on distressed mortgages, it is important for investors, servicers, and risk managers (in both the private and public sectors) to have a robust framework for thinking about the future performance of modified mortgages. This article highlights the authors’ research on loan modification performance, which looks at loan and modification characteristics as well as the timing of the modifications to identify key drivers of the redefault rate. The authors find evidence to support the widely held view that modifications that include principal forgiveness and result in significant reductions in payment requirements produce lower re-default rates. They also find evidence suggesting the better performance of recently initiated modifications is not just a function of more effective modification terms but also of the improving macroeconomic climate.